Friday, February 10, 2006

An EFT Network First...Biometric PIN Debit

Pay By Touch Closes in on 'Biometric Proxy' for PIN in Debit Payments

Debit card transactions authenticated by a biometric scan rather than a PIN will likely start flowing through at least one electronic funds transfer network by the second quarter of 2006, according to Pay By Touch Solutions, a San Francisco-based supplier of fingerprint-authentication systems for point-of-sale electronic payment.

Eric Bachman, chief operating officer of merchant services at Pay By Touch, says one network, which he refuses to name, has agreed to change its operating rules to mandate that banks accept Pay By Touch scans in place of PINs for guaranteed funds in a process the network refers to as "biometrics as proxy for PIN."

Bachman says he expects to announce the arrangement at the end of February. Another unnamed network, Bachman says, is very close to following suit. "We're making very good progress," he says.

The pending move by the EFT networks would represent the first time in the roughly 30-year history of the PIN debit business that banks have agreed to accept anything other than a PIN to authenticate cardholders and guarantee funds to merchants.

The networks have allowed so-called PIN-less transactions for Internet payments, but these are restricted to a narrow range of low-risk industries, such as utiltities and insurers, and in these cases merchants assume the risk of fraud.

The network action would also allow Pay By Touch--which announced it acquired its largest rival, BioPay LLC, and closed on its $47 million acquisition of merchant processor CardSystems Solutions Inc.—to enable so-called tokenless payment for PIN debit accounts. Pay By Touch's system works by matching a customer's fingerprint scan to a centrally stored template, which is linked to certain payment accounts designated by the customer at enrollment. If the match is made, the transaction proceeds as if a card had been swiped or a check written. In this way, customers are able to pay for goods in-lane without presenting a card, check, key fob, or other token.

For credit card and signature-debit accounts, Pay By Touch transactions process as so-called card-not-present payments, which carry a higher interchange rate. But PIN debit networks, which require a match at the point of sale between the PIN entered by the cardholder and the PIN offset embedded in the card's magnetic stripe, have no provision for card-not-present transactions. With the expected network rule changes, Bachman says Pay By Touch will ask cardholders to enter their PINs at enrollment, at which time Pay By Touch will switch out to the networks to authenticate the card. After that, the company will store only the card account numbers.

By enabling PIN debit transactions, Pay By Touch would enter a hot transaction market growing in excess of 20% annually. It would also reinforce its position as a processor of low-cost payment alternatives at a time when merchants are showing considerable frustration with credit card interchange rates. The company already handles electronic payments on checking accounts, which are settled through the automated clearing house. Transactions settled through PIN networks are more expensive to merchants than ACH payments, but are substantially cheaper than credit and signature-debit card transactions. "Retailers are enabling all the lower-cost payment types," says Bachman.